Kevin Healey is the Managing Director, of Medica Holdings Limited. Medica was covered in Edition 1 of Bioshares. Medica is a Pooled Development Fund, and has invested in three companies – Alchemia, Cytopia and Xenome.

Can you give us a wrap on where Medica’s investments are at the moment?
Alchemia was our lead investment, our first investment. It is a step ahead of the others in it’s proximity to market. It turns out that Alchemia’s ability to make carbohydrates is the only flexible and economical technology worldwide.

There have been a few competitors along the way, like Trancell, who have basically stopped developing their technology because it doesn’t work. You have Neose, which has an enzymatic technology to make carbohydrates which works, but isn’t flexible, and it isn’t quite as economic They have quite a long development path for every synthesis they want to make. Whereas Alchemia’s technology is very flexible.

There are just so many applications for the technology that it has a huge potential on the commercial front. You can imagine there are plenty of anti-cancer drugs in the clinical trial area that are carbohydrate based. There are new antibiotics based on carbohydrates. I think that the most recent and most important step forward for Alchemia is scale-up. A large scale US based chemical manufacturer has proven the scale-up potential of Alchemia’s technology.

Is this to go from milligrams to grams?
We are in practice in the kilogram stage. Which is the level we want to be at for some of the most promising markets. We really are poised for Alchemia to be the lead supplier of carbohydrates worldwide. And I’m not talking about the naturally extracted ones but the chemically synthesized ones.

In terms of recent activity the scale-up is crucial. All the other technologies are going very well. We made a step forward in the combinatorial library front. We’ve been making libraries of chemical based on carbohydrate structures that are being screened for antibiotic activity already. That has to be further developed. But it’s all looking very promising

Cytopia has been looking at discovering new anti-inflammatory drugs on the one hand, based on some proprietary targets. The major step forward there is that we have been able to assemble a computer model of the JAK-2 molecule has surprised us in that it has some features that give us some insight into how the whole JAK activation cascade works. I cannot tell the details of that because it is going to be the subject of a new patent application in the near future. By using this virtual model technology that Vertex have alluded to and Kinetix are using, you can screen a large number of molecules using a computer modelling system. So the computer model takes each individual potential lead compound or inhibitor, fits it into the perceived active site of the molecule, the JAK protein, and tells you whether or not it would even be a prospect of binding. So a lot would be eliminated because of stereochemical or size factors or charge factors. Now the beauty of this is that you can reduce the screening library from half a million to five thousand.

That’s pretty good!
We’ve set up a collaboration with a group in the UK to do this model evaluation work. We are sourcing chemistry from a number of companies. Some of which is propriety chemistry that no one else can get hold of. We have an exclusive right to use it. You can use your imagination to decide who that is.

We think that we have some inhibitors that we are using as models to elaborate the chemistry around those so that they would become lead candidates and then would go into our validation models, which are the step before preclinical trial. We hope to be approaching preclinical work be the end of this year.

Xenome- we have advanced our share holding to just on 42%. The major thing at Xenome is indirect. The company will receive from the University of Queensland’s (UQ) a potential revenue stream from a molecule being trialed to treat acute and neuropathic pain. The molecule is under license to AMRAD from UQ. It was developed through collaboration between AMRAD and the 3D Centre, which Xenome sprang out of. Xenome, as part of its deal with the University of Qld, and apart from getting a whole lot of technology, has been given the University’s potential revenue stream so that’s added a lot of value to Xenome. Apart from that there are a number of novel molecules we are giving priority to. One of which has advanced to the next stage and that is a molecule that has the potential to develop new antidepressant drugs. The reason we are confident about that is the molecule has been found to bind to the same receptor that current antidepressants bind to.

Is that one of the seratonin receptors?
This one is the noradrenalin-uptake receptors, but this molecule binds to a site that is quite different. It suggests that we can interfere with the receptor in quite a new novel way that no antidepressant drug on the market yet does.

That sounds interesting!
It does! We’ve developed an assay if you like that can be used in high throughput, so that companies could screen large potential libraries for new antidepressants. We also have got an inkling of what sort of molecules will inhibit that binding and affect that site. That’s all very exciting. Obviously we don’t expect the molecule, being a peptide, to have the potential to be an antidepressant drug in its own right, that’s highly unlikely, but a mimetic of it is quite possible. We have got some design inspirations, if you like, for how that could happen. But the other molecule that is exciting us a lot also has a unique pharmacology. We think it has potential for treating urinary incontinence, which is a by-product of benign prosthetic hyplasia. I think sixty percent of men over sixty have some sort of urinary incontinence problem, ranging from almost not noticeable to quite severe. This molecule has the ability to inhibit the group of receptors that are important in urinary tract control. We need to do some refinement in and around the receptor, the subgroup.

Has Xenome moved into new facilities?
The new facility is up and running. The only aspect to be finalised in the next few weeks is the high through put peptide synthesis (project) because we’ve been developing a new instrument in collaboration with a company in the US. We are developing a new instrument, which is going to allow parallel high-throughput peptide synthesis. I’m not talking about small peptides, I’m talking about 30 to 40 amino acids long that can be synthesised in an hour to two hours. These are quite complex molecules that require folding.

They manage to create the appropriately shaped and formed molecule?
Yes, and we can play around with the sequence. A lot of these molecules, which are modelled on the conotoxins extracted from cone snails, have a basic structure that is quite rigid. However you can play around with some of the sequences that are in and around the binding sites. So we can play a bit of combichem in and around the naturally occurring molecules to optimize activities and refine the activities where we want a specific sub-type of receptor to be hit and not the broad group. We have the capability of doing that and you can quite rapidly look at a hundred peptides for instance in and around a particular theme.

So there is a lot of chemistry in each of the companies Medica has invested in?
That’s right. It’s a set of companies that is using the latest and the best. Not just pieces of hardware. Each one in their own way has unique technology. If it is not proprietary, then we are getting hold of it because there is no point in being second to the line. You either use the technology available out in the market place, that you know your major US based competitors are using, or you don’t bother. You have to keep up or get ahead. Preferably to get ahead. Alchemia is ahead and Xenome’s peptide technology will place it ahead in being able to do that.

Somebody once said that Medica is too scientific. Could you comment on that?
That is an archaic market viewpoint, that if you don’t have a product on the market or cash flow people won’t look at you. It is extremely common in the US biotech market for the company to be formed at quite an early technological stage It is quite accepted scientists think nothing of moving out of academia, or even being fluid between the two, in the US. That is why US biotechs really fire up quite quickly. They have the best brains on the job straight away. Academics don’t think twice about moving into a corporate environment to do their research. You have to do the step between the ultra-basic research and the corporate focused research in a company environment or it never happens. We find that if you try and take the next stage in the academic environment you may eventually get there but it takes ten times longer than it should because it isn’t focused.

So that’s what commercialisation brings, it brings focus?
Absolutely! It brings focus. Everyone collectively pulling the same direction to achieve an end point. The reality is the end point has to be the value-adding feature that allows you to raise the dollars to go to the next stage.

What’s your competitive advantage?
The major advantage for Medica is the lower risk spectrum of the portfolio relative to individual biotech investments. We are offering a product to investors interested in getting an exposure to the biotechnology sector and our advantage in that respect is the portfolio approach. There are not that many, if any, other listed vehicles for doing that. So rather than individual investors picking winners they can get an exposure to the sector through Medica. The PDF tax-exemption that PDF shareholders get is another advantage over a Circadian-type investment.

What are your major challenges going forward?
The bulk of our shareholders now are not biotechnology literate. They read a bit about the sector and they know from what they read its got some upside potential. There is a significant future in new therapeutics and the Human Genome Project has created a lot of attention to the sector but they are relying on Medica to deliver and the investments have to deliver. So I think that as companies like Alchemia hit milestones, make commercial announcements, get liquidity in their own right through listing (NASDAQ or ASX), then Medica’s value can be interpreted a little bit more straightforwardly and I think that is our big challenge.

What keeps you up at night? What are the risks with Medica?
The only thing that’s kept me up at night was watching the NASDAQ index when we had an underwriting agreement we were using the NASDAQ index as a benchmark. [Editor: Thorney Holdings did not go through with a placement in Medica in April this year due to a 10% plus fall in the benchmark NASDAQ Index] I think the major risks are the same ones that all biotechs face. Inevitably some technology will fail to deliver but we have two things that we are offering which are different to the average newly listed biotechnology stock. One is we have a portfolio approach. If one fails then even one major success in our current portfolio would outweigh failure in our others and as our portfolio expands that will be even more so. And the other is, that the technologies in the companies that we have chosen to invest in, have more than one opportunity to deliver a product to market. If a combichem library approach to developing new antibiotics fails it may well work in delivering anti-cancer drugs or it may well work in another area. If the contract synthesis part of the business isn’t as lucrative as we’d thought, our own in-house drug development is likely to deliver or could deliver new products and add value that way. Alchemia doesn’t just have one string to its bow and all the other companies are in the same boat in that respect. It’s no different to the huge US based venture capital funds. They are just building portfolios and 60% of their money last year was into platform technology.

For investors following Medica what are key events to monitor?
Each of the companies we have invested in has had a significant date to hit by the end of the year. In Xenome’s case it is probably the trial of the pain drug, and even though we are not in control of that we stand to benefit from the potential revenue stream so it is important for it to go ahead. I would place more importance on our own internal milestone and that is to setting up an alliance to develop this antidepressants discovery. If we can get that working (set up an alliance) I would consider that almost as important a milestone for the company. That’s totally in-house, 100% owned by us. It’s important that we generate our own clinical prospects. Cytopia – we are already looking at some molecules that are quite interesting and we are refining those and we hope that later in the year we will be would be classifying them as a lead. Alchemia – it’s got to set up this large scale synthesis which has been proven to work and now the commercial arrangements are being thrashed out (by the end of the month). We’ve had a term sheet and that looks very good. Medica – we raised some money and that was done for a purpose and that is to make more investments. We are being very fussy I suppose, because we have this policy of investing in platform technologies, and we’ve been offered quite a number of investments that are one product oriented.

What is your definition of a platform technology?
My definition is that it is a generic technology that can lead to multiple therapeutic products through different applications of the technology. So if someone comes along and tells us they are going develop a device that does x and that’s all it does, we are unlikely to invest, unless the commercial aspects were so compelling we would look at that as an individual opportunity. So far I haven’t seen any of those.

Do you think the market understands what you are doing, say on a scale of one to ten?
To answer that you have to ask if they understand biotech and the answer to that is probably no. Do they understand our strategy? I’d give that a five because we’ve been doing our best to explain it and I think it is catching on. I’d say it is catching on because others are starting to follow us in the strategy as I pointed out earlier. Other funds are being started up some of which are much larger like from Colonial and so. I would say that we have a long way to go to get total acceptance of our strategy. We were the first listed biotechnology fund and we haven’t reached the stage, for example where, large fund managers who couldn’t directly invest in the sector, would say that Medica was a good vehicle to have an exposure through. I don’t think that has been achieved yet. Some of the reasons for that are the perceived risks and the other is the size of Medica and so one of the objectives is to grow the company. We do also see ourselves as a bit of a lead in the sector in terms of being able to offer not just to the public but the institutional fund managers a vehicle for having an exposure in the sector. To do that, and to be fair to our shareholders, we have to be a lot bigger.

Are you happy with the share price at the moment? What do you feel about the value the market is putting on it at the moment?
Well, if I can give you a philosophical answer, too achieve a fair market value you need a couple of things:

Firstly, a market that’s informed. It’s got to be well advised and able to make rational judgements about the value of the stocks, particularly given the lack of cash flow in most biotechnology, and traditional valuation methods not being effective because you have investors that have to the value of shifts of the company on the basis of very brief ASX announcements. The public cannot judge the weight to place on those announcements because they have no international perspective, no competitive perspective. We’ve seen some recent announcements which have been not been misleading but misinterpreted by investors.

I think secondly you have to have sufficient number of buyers and sellers in the market to establish that fair-trading price. That very rarely occurs in the ASX biotech. It occurs in bursts when there is a flurry of activity but the trading isn’t high enough constantly enough to say that, as you would with Telstra, that’s a fair market price given that there are a million investors and they are all trading and that’s the definitive market price. I don’t think you have that in the biotechnology sector. So we’ve got to weigh that up against we are always preaching to our investors: that we have a long term strategy and we would like to reflect the intermediate gains to them in the market place, and fairly. Because its such a timing issue when there is reasonable levels of trade going on and where people have been informed well enough you cannot always be assured that market forces will give you a fair share price.

In summary, I would say that we don’t have a fair share price at the moment and that’s a reflection of history as well (as the fact) that Medica was started at a time when the financial markets were pretty tough, and we didn’t over estimate our worth to the market at all. In contrast some companies that have come to the market when everything is going extremely favourable and larger valuations were accepted. It takes a long time for an overvalued company or for that over-valuation to be ultimately recognised by the market. Similarly, that whole conservative valuation we entered the market with a year and a bit ago will take an equally long time for it to be up-valued and that will happen on the back of performance and we are dedicated to doing that.

Can you give long term investors two to three reasons to hold Medica stock?
In answer to that I have couple of reasons that are all quite different. The fact that the current portfolio is hitting their milestones and that would add substantial value if the market recognises that is one.

Secondly the strategy of the company is well proven in US biotechnology circles, I think by US venture capital groups, although they tend not to be listed. But the overall strategy is right. All we are trying to do is the venture capital approach with a more fluid fund on a public market. It’s asking a lot more of the strategy I suppose but the underlying strategy is right. And others are already starting to follow our strategy. A biotechnology exposure is very sensible for investors who have a portfolio. They want a balanced portfolio. Money shift from the Internet wave will happen into the sector. It has already happened in bursts and we expect that to continue. The application of the human genome material will fire that as well.

What have Australian investors still got to learn about biotech investing?
I think they have to learn it is an international game. Very few Australian biotechs will deliver a new product onto the market by themselves. The ones that have internationally competing technologies will be successful. They should be looking to critically review particular evaluations that are offered to them in floats and critically review announcements about so called ‘developments’.

What do you mean by that?
That announcements are taken in the international context of what is important with respect to getting product to market. Some are obviously quite significant as we have seen recently and some aren’t. I think investors have just got to learn the hard questions about how that announcement assists in the company getting the product to market and is it a significant step or not a significant step.

Just to close is there anything we have missed or you want to discuss?
We didn’t touch on Medica’s growth and the growth issue. As the value of Medica increases we have to recognise then two things will start to happen. One is we will be able to achieve liquidity in our investments as time goes by, we’ll make more investments and the investments we make will probably get bigger. We’d like to see ourselves investing, not just in start-up early stage company where we can have a big influence, but also investing at the mezzanine stage of companies as we get larger, and we’d like to do that through encouraging one or more strategic investors into Medica. They may be in Australia or they may not.

Thanks for your time.